Streaming has become the norm for many TV viewers, but streaming companies are still duking it out for eyeballs and subscriptions. The lead position in consumer accounts mostly see-saws back and forth between Netflix and Disney, while the smaller players are still figuring out their place.
Both Netflix and Disney launched ad-supported tiers over the last year, infringing somewhat on Roku's (ROKU -10.29%) turf. But Roku has an advantage over these larger peers that is setting it up for success.
Ads follow viewers
Roku has two different businesses: the device business and the platform business. Roku's device business comprises hardware that viewers use to stream content -- either Roku-enabled TVs or devices that physically hook up to screens to allow them to be used to show streaming media -- and its embedded software. Roku has the top streaming operating system in the U.S., even up against rivals like Amazon, which sells its own streaming devices under the Fire brand.
The device segment was growing nicely until supply chain issues began roughly three years ago, which were followed by high inflation. Roku management resisted price increases, for reasons we'll get to in a minute, and sales declined for a time. But device revenue has been increasing again -- 9% year over year in the 2023 second quarter.
The device business is a way for Roku to get customers onto its platform, driving revenue for the advertising tied to streaming. Management keeps device prices low as a means to bring in new accounts, because the platform is much bigger, with more opportunity.
Platform segment revenue mostly comes from advertising. As Roku onboards more accounts, it attracts more advertisers and it brings in more revenue. In the second quarter, platform revenue increased 11% year over year and accounted for the vast majority of the total top line: $744 million vs. $103 million for devices.
That's why activating more accounts is a key part of Roku's model, even though it doesn't make money from subscriptions and relies on ad revenue instead. The number of active Roku accounts continues to grow sequentially, and in the second quarter they were up 16% year over year.
Completely free, even with the fine print
How long customers stream content is an important indication of engagement with a service, and that metric informs how advertisers spend their money. Streaming hours on the Roku platform increased by 21% in the second quarter. At the same time, traditional TV viewing hours decreased by 13%, according to Nielson.
This is where Roku's major advantage comes in, because it's completely free. Traditional TV viewers, unlike cable TV viewers, don't pay, and many of them won't or can't pay for a streaming service. That's a huge market opportunity for Roku.
Disney and Netflix raised prices last year and began to offer ad-supported tiers of their streaming services at lower prices than their ad-free subscription rates. However, subscribers still have to fork over $6.99 or $7.99 monthly for them, even with the interruption of advertisements.
There's still competition
Roku isn't the only free, ad-supported service. Paramount Global operates Pluto, which tops Roku in users -- Pluto had more than 80 million as of May 2023, vs. 73.5 million Roku active accounts. There's also Amazon's Freevee, YouTube's Tubi, and plenty more. So Roku doesn't have a monopoly on free streaming channels, and must compete with the others for eyeballs and advertisers.
What's unique about Roku is how it leverages its operating system to attract account holders and generate revenue. Every owner of a Roku or Roku-enabled device sets up an account and has automatic access to Roku's free channels, bringing them into its ecosystem. Roku has also started to create its own content, called Roku Originals, so it doesn't have to rely solely on third parties to supply its channels with content. Anyone watching Pluto, for example, on a Roku device has easy access to every Roku channel as well. Roku also has more AVOD (ad-supported video on demand) channels, while Pluto is known for its FAST (free ad-supported streaming TV) channels, which are not on demand. Roku drives user engagement by combining both of these services along with paid subscription services in its searches and recommendations throughout its network.
Roku is gaining ground
Nielson tracks viewership monthly, and in July, streaming numbers hit a record high while broadcast TV's share of total viewing touched a record low. Broadcast TV viewing was down 3.6% year over year to 20% of the total, while cable slipped 12.5% from last year to 29.6%. Streaming hours hit 38.7% of the total, and Roku channels accounted for 1.1 percentage points of that. Much of the viewing on other sites happens on the Roku OS as well.
All of the streaming companies gain from these trends, but Roku is uniquely positioned to capture market share from the declines in traditional TV viewing. It's struggling to turn a profit right now, but it could be a fantastic stock to own down the line.
